Who Gets Online Sales Tax Revenue?

While analysts predict that online retail sites like Amazon are expected to enjoy growth rates of as much as 20% per year, bricks and mortar stores, including small businesses, can expect annual growth rates to decline to as little as 2.1%. Those of us who already have access to broadband know what a convenience it is to buy goods online, both in terms of the lower prices offered by online retailers and the ability to shop online without having to spend time walking or driving to several different stores looking for the right item. But Congress is considering legislation that will not only make shopping online more expensive, but could also generate tax revenues that will benefit the wealthiest Americans.

Since 1992, cash-strapped states and local governments and businesses have been lobbying Congress to pass legislation authorizing states to collect online sales taxes from remote sellers. That year, the Supreme Court held in Quill Corp. v. North Dakota that online retailers are not required to collect state sales taxes from consumers in states where the online retailers do not maintain a “physical presence.” But this opinion explicitly left it up to Congress to enact legislation to permit states to collect taxes from such remote retailers.

Momentum is building for Congress to follow suit and enact legislation. The bi-partisan Marketplace Fairness Act (MFA) would allow states to collect sales taxes from sellers without a physical presence in the state where the consumer has initiated the transaction. Under the MFA, states will be permitted to collect these taxes provided that they agree to the multistate, Streamlined Sales and Use Tax Agreement (SSUTA), which 44 states, the District of Columbia, local governments and the business community have already agreed to. States that have not agreed to SSUTA may collect state taxes from remote sellers if they agree to implement a minimum set of requirements set out by the MFA.

By exempting small online retailers with annual revenues of less than $500,000, the MFA does good things for smaller outfits competing against behemoths like Amazon and E-Bay. But the effect of the MFA on low-income consumers is less clear.

Proponents of the MFA argue that not collecting such taxes amounts to a regressive tax regime in which only those with access to the Internet are able to take advantage of the lower prices offered by online retailers. The MFA, they argue, levels the playing field by ensuring that online consumers pay the same taxes on goods as consumers who are forced to purchase the same goods from local establishments. This line of reasoning neglects to consider low-income consumers who do have access to broadband. Authorizing states to tax online purchases from sellers outside of the state would harm low-income consumers both by increasing prices and resulting in state revenues that do not inure to the benefit of the consumers in the states where online retailers maintain a physical presence.

Before enacting the MFA, Congress should fully consider the effects of the tax on low-income consumers. Specifically, Congress should consider whether the states in which online retailers tend to maintain a physical presence have a lower or higher tax base than the states where consumers most often initiate online transactions. Congress should then consider how each state allocates sales tax revenues once they are received. If proponents of the MFA are correct in asserting that most online purchases are made by consumers from upper-income tax brackets, taxing transactions according to rates established in the affluent areas where these consumers live would ostensibly benefit areas that are least in need of revenue.

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